The FHFA Is Joining Forces With The New York Attorney General To Investigate Fannie And Freddie

The Financial Times
reports that the federal watchdog with responsibility to
oversee Fannie, Freddie and the Federal Housing Finance Authority
has agreed to cooperate with the New York attorney-general to
investigate banks mortgage securitization practices.

The agreement is notable for two key reasons.

First, the investigators will be able to share and discuss
documents and findings, while pooling resources to more
effectively search for wrongdoing.

Second, in NY AG Eric Schneiderman, the inspector
general supervising Fannie and Freddie as well as the Federal
Housing Finance Agency, Steve Linick, will have an ally
with broad legal authority:

The New York attorney-general is armed with the state’s Martin
Act, considered one of the most powerful prosecutorial tools in
the country. The law allows Mr Schneiderman to investigate anyone
doing business in New York and to bring cases without having to
show that the accused intended to commit fraud. State prosecutors
need only prove that a fraud was committed, which state courts
have defined as “all deceitful practices contrary to the plain
rules of common honesty”.

The law allows Mr Schneiderman to pursue civil and criminal
probes, and to seek felony criminal convictions. The Martin Act
confers broader powers than federal securities laws used by
agencies like the US Securities and Exchange Commission, which
must show intent when bringing fraud cases. Previous New York
prosecutors such as Eliot
Spitzer have wielded the law to extract billions of dollars
from Wall Street firms for alleged wrongdoing.

The comparison to the authority of the SEC is
particularly striking, underlining the extent to which this
agreement is likely disheartening to the focus of Schneiderman's
investigation.